Business as usual
- FLCT enjoyed strong occupancy and rental reversions in 3QFY9/22.
- It has a robust balance sheet with a gearing of 29.2%.
- Reiterate Add rating, with a lower TP of S$1.53.
Highlights from 3QFY9/22 business update
In its 3QFY9/22 update, Frasers Logistics & Commercial Trust (FLCT) reported that its overall portfolio occupancy was 96.5% as at end-3QFY22 (vs. 96.1% in 1HFY22), with its logistics/industrial (L&I) portfolio remaining fully occupied. The take-up rate for the commercial segment was stable at 91.3%. Alexandra Technopark (ATP) and Farnborough Business Park (FBP) enjoyed higher occupancy of 93.2% and 82%, respectively. In 3QFY22, FLCT renewed 173,087 sq m of leases, with an average 9.9% uplift in rents, led by the L&I portfolio. Despite macro uncertainties, management indicated that the overall operating environment is expected to further improve with strong tenant activity, on increased e-commerce and supply chain security demand.
Uptick in portfolio occupancy amid stronger rental reversions
On a qoq basis, 3QFY22 saw stronger leasing activity, while rental reversions benefited from inflationary pressure, particularly in Europe, where its renewal leases were CPIlinked. L&I and commercial leases in Australia were re-contracted at average reversions of +5.5-9.2%, while in Europe, one L&I lease was renewed at a 17.7% rental uplift. FLCT has 0.9% of gross rental income expiring in 4QFY22F and another 13.1% in FY23F. In terms of acquisitions, FLCT acquired S$290.5m worth of suburban offices and L&I
properties in Australia and UK in 3QFY22, including the forward-funding purchase of Ellesmere Port in the UK. The latter is expected to complete in 2HCY23 and has been fully pre-let to Peugeot for 15 years.
Robust balance sheet, with gearing at 29.2%
Gearing stood at 29.2% as at end-Jun. Its all-in cost of borrowings was stable qoq at 1.6%. FLCT has completed most of its refinancing requirements for FY22F. With 80.6% of its debt hedged into fixed rates, FLCT guided that every 50bp increase in interest rates would impact its DPU by 0.05 Scts. While the rising interest rate environment has resulted in a slower transaction market, however, FLCT is well-positioned to tap inorganic growth, including new acquisitions or development opportunities (particularly logistics/industrial or suburban office assets) with its strong balance sheet. In the meantime, management indicated it could provide some top-up from divestment gains during the income vacuum
period, following the divestment of Cross Street Exchange.
Reiterate Add rating
We lower our FY22-24F DPU estimates by 2.4-4.2% as we factor in a lower A$, €, and £ exchange rate. As a result, our DDM-based TP is lowered to S$1.53. We have not assumed any pre-emptive new acquisitions in our estimates. We like FLCT’s visible inorganic growth potential and income resilience. Potential re-rating catalyst: accretive new acquisitions. Downside risks: inability to make accretive purchases and slow global macro outlook.